2009 Review of the Chinese Market

Growth Continues but Challenges Remain in China‚Äôs Wind Industry

Wind power development in China continues to be strong, doubling for a fifth year in a row in 2009. For the first time last year, China lead the world in new installed capacity with an annual installation of 13.8GW. China became the second largest country in terms of cumulative installed capacity in 2009 surpassing Germany with a slight margin. In the meantime, three Chinese turbine manufactures - Sinovel, Goldwind and Dongfang - joined the list of the world‚Äôs largest turbine manufacturers and there are five Chinese manufacturers on the top 15 list.

Growth Drivers

China‚Äôs wind power base initiative continues to be the major driving force for wind development, and the seven wind base projects will have a total capacity of more than 127GW by 2020. Although the 2020 updated wind development plan with the wind power base initiative was never made official by the Chinese government, it is clear that the country won‚Äôt fall short of 150GW by 2020.

Mid-2009, the government attempted to slow the overheated Chinese turbine manufacturing business. At the end of 2008 there were almost 80 turbine manufacturers, although less than 30 companies actually had products on the market. The overheat was partially caused by the call of provincial and local governments for turbine manufacturers to set up facilities in their provinces. Seeing the waste of resources and capital this cause, the central government decided to halt unnecessary expansion. Meanwhile the manufacturing overheat has slowed, but it is important to note that the central government‚Äôs response to this manufacturing issue should not be interpreted as shift in overall policies on wind development in China.

Competition between Chinese domestic turbine manufacturers and Foreign Invested Enterprises (FIEs) has intensified. At the end of 2009, the share of FIEs had declined to only 13% of the total annual market, and in order to survive, most FIEs have lowered their prices. The Chinese government now needs to regulate the market by introducing technical standards and shifting the focus from turbine installation to electricity produced. In order to have healthy market competition, turbine quality and price need to be equally considered.

Heavy domestic competition has prompted some Chinese companies to start eyeing the international market. At the end of 2009, five Chinese companies had exported 28MW of turbine to the United States, the United Kingdom and Thailand. However, no Chinese manufacturer has cracked the European market thus far.

It is time for the Chinese market to open its wind development business to foreign companies. Chinese wind development has been monopolized by the stated owned energy companies, mainly the ‚Äòbig five‚Äô state owned energy companies and the provincial government-owned energy companies. A more open market for developers would lead to better services and pricing, sharing the last 30 years of project development and management experience.

Offshore development: ambitious plans but caution is needed

Offshore development has kicked off in China. In April 2010, the Shanghai Donghai Bridge 100MW offshore project completed its installation, and after some initial struggles with grid connection, it was online in June 2010. On the policy side, in January 2010, the National Energy Bureau and the State Oceanic Agency, announced development guidelines via the Regulation of China‚Äôs Offshore Project Management. It stipulates that offshore projects will follow the concession tendering process when selecting the project developer and determining the tariff of the project.

The first round of offshore concession tendering was launched by the National Energy Agency (NEA) in May 2010, and included four offshore projects in Jiangsu Province, totaling 1,000MW. The result of the bidding will be announced in September 2010. In the meantime, 11 coastal provinces and cities are also drafting offshore development plans. Currently, five coastal provinces and cities (Jiangsu, Shanghai, Zhejiang, Shandong and Fujian) already have a tentative plan for 20GW of offshore development by 2020.

Domestic turbine manufacturers are as enthusiastic as local governments about offshore wind power development. The top three Chinese turbine manufacturers - Sinovel, Goldwind and Dongfang - have opened facilities in coastal provinces specifically for offshore turbine manufacturing. Other companies, such as Shanghai Electric, United Power and CSIC are currently testing their intertidal offshore turbines, and XEMC bought Darwind and its 5MW offshore turbine technology. The two international offshore giants Vestas and Siemens also are poised to jump into China‚Äôs offshore business.

With China‚Äôs offshore wind development on the rise, it is important to reflect on its growth and direction. The Chinese wind industry is the world‚Äôs fastest growing market and is the most widely used success story of wind development in emerging markets and government policy as a major driving force for renewable energy. However, after these years of rapid development, it is time for China to shift its focus from quantity to quality and from installed capacity to electricity generated. Furthermore, China should work to move beyond only fostering the domestic manufacturing base to allowing the world‚Äôs leading companies to participate in the market.

Offshore development shows huge promise, with the costal provincial plan, expansion of offshore turbine production and the first round of national concessions. Important lessons learnt from onshore development can and should be applied to China‚Äôs offshore development. It took Europe more than ten years to begin large-scale development in offshore. Shanghai Donghai Bridge, China‚Äôs first offshore project, has been operating for less than a year. Before large-scale buildup, there is a need to collect more experience in the management and operation of an offshore wind farm. Furthermore, there are many technical issues which need to be solved, such as grid integration for offshore wind.

Offshore concession tendering will need a lot of attention in the years to come. With onshore concession tendering, the problem remains that the tariff is too low thanks to the rules set for the bidding process, which focuses solely on the tariff. Furthermore, State Owned Enterprises focus more on winning a bid rather than on project profitability. If the tariff process is not normalized in the offshore concession tendering process, the low tariffs for offshore projects will hamper overall offshore development.

The CDM setback and the way forward

Last year there was shock in the Chinese wind industry when the CDM Executive Board (EB) rejected Chinese wind projects based on concerns of ‚Äògovernment manipulation of the tariff‚Äô. The issue has triggered discontent amongst the industry as the EB charges were thought to be unsubstantiated. These problems are dangerous for the Chinese wind industry, as CDM money is still fundamental for many wind projects.

The feed-in tariff introduced last year was a step in the right direction, but it is still not enough to ensure project profitability. Pending issues such as timely grid connectivity, grid curtailment, and new taxes from local governments still impede profitability. Because of these outstanding issues, CDM support remains crucial for wind development in China. With the CDM setback this year, projects developed before the introduction of the 2009 feed-in tariff will find it more difficult to register as CDM projects, especially those from some provinces such as Shangdong. In the future, offshore wind projects may become eligible for CDM support, and the Shanghai Donghai Bridge wind farm has already applied and been registered as a CDM project.

China‚Äôs booming wind industry has been the major driver of global growth in the sector in recent years, but all parties agree that the focus needs to shift to a substantial degree from ‚Äòquantity‚Äô to ‚Äòquality‚Äô if the Chinese industry is going to be truly sustainable for the medium and long term.

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[1] Published by Wind Power Monthly, China Special Report, October. 2010.